An investor can design a risky portfolio based on two stocks,A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is _________.
A) 0%
B) 6%
C) 12%
D) 17%

Question

Quizplus · Accepted Answer

The standard deviation of the minimum variance portfolio is calculated using the formula: sqrt((w_A^2 * σ_A^2) + (w_B^2 * σ_B^2) + (2 * w_A * w_B * σ_A * σ_B * ρ_AB)), where w_A and w_B are the weights of stocks A and B, σ_A and σ_B are their standard deviations, and ρ_AB is the correlation coefficient. With ρ_AB = 0, the formula simplifies, and the minimum variance portfolio standard deviation is 12%.

An Investor Can Design a Risky Portfolio Based on Two